Is Flipkart valuation drop a new normal on how Internet cos will now be valued?

“In general, growth rates (of Internet companies) have declined and they are not that much ahead of the rest of the world, on a much smaller base,” said Neeraj BhargavaMadhav Chanchani | ET Bureau | November 30, 2016, 01:00 IST

The notional lowering of the valuation of India’s largest online retailer to about $5.5 billion comes amid a potential drop in Ola’s worth as the online taxi aggregator negotiates its latest fundraise.

“We are out of the period of irrational exuberance and old valuations are meaningless,” said Neeraj Bhargava, managing director at investment firm Zodius Capital. “There is a new normal and in some cases a reboot.”

The latest markdown by Morgan Stanley, which through multiple mutual funds owns a little more than 1% in Flipkart, comes as the online retailer braces for the impact of the crackdown on cash transactions to hit business after having regained momentum during the festival season.

Mutual fund investors T Rowe Price, Fidelity and Valic, too, marked down their holdings in Flipkart this year, although none of these pegged the company’s worth below $8.8-9 billion.

Flipkart, as before, dismissed the latest markdown, insisting that it was a “theoretical exercise and not based on any real transactions.”

“We are seeing strong traction in our business momentum and operating performance. We continue to be focused on innovating for the customer, growing the market and executing on our long-term growth agenda,” the company said in an emailed statement.

Ola, India’s largest ride-hailing service, was in talks to raise capital at a valuation of $3 billion-$4 billion, lower than the $5 billion it was valued at when it raised funds in November 2015, ET reported last week. That would make for the first so-called ‘down round’ of an Indian Unicorn, or a billion-dollar Internet company.

As compared to Ola, the markdown of Flipkart’s worth is notional as it has not raised capital at lower valuations. Flipkart was valued at $15.2 billion when it last raised funds in July 2015.

The developments indicate a new normal where companies will be valued based on their business fundamentals than on investors’ fear of missing out on the next hyper-growth Internet company, say experts. While Internet companies were able to grow at 200-300% last year by aggressively discounting as easy capital was available, growth rates have slipped now.

“In general, growth rates (of Internet companies) have declined and they are not that much ahead of the rest of the world, on a much smaller base,” said Bhargava. Zodius Capital is an investor in grocery e-tailer Bigbasket and furniture seller Pepperfry, among others.

This, though, does not mean markdowns across the board for Internet companies, he said, pointing out that e-tailers such as eyewear brand Lenskart and beauty products seller Nykaa enjoyed healthy valuation increases this year during fundraising due to healthy metrics.

The Morgan Stanley fund marked the value of its Flipkart shares at $52.13 apiece as on September 30, as compared to $84.29 each at the end of June, as per its filings with the US Securities and Exchange Commission. As at June 2015, the fund had valued its Flipkart shares at $142.24 apiece.

The development comes as Flipkart is looking to shore up capital to defend its pole position against US rival Amazon that has significantly ramped up its India operations in terms of both product and investment.

Amazon has committed $5 billion to the Indian market and is outspending Flipkart by 3-4 times by investing aggressively in areas such as video and grocery delivery. Amazon India has gained significant ground this year, rapidly closing the gap with Flipkart in terms of gross merchandise value (GMV), or gross sales.

In October, though, as both companies held their flagship festival sales events, Flipkart was able to claw back some of its lead in terms of sales.